Progress Software Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended November 30, 2014. The filing also reports fourth-quarter results; figures below are in U.S. dollars unless stated otherwise.
Business context
Progress sells software for application development and deployment, data connectivity and integration, and data analysis, through perpetual, term, and subscription models. Effective September 1, 2014, it reorganized into three reportable business units: OpenEdge, Data Connectivity and Integration (DCI), and Application Development and Deployment (AppDev). More than half of license revenue is generated through indirect partners; 55% of FY2014 revenue came from outside North America.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $332.5 million | $334.0 million |
| Software license revenue | $117.8 million | $122.3 million |
| Maintenance and services revenue | $214.7 million | $211.7 million |
| Gross profit / margin | $298.3 million / 90% | $299.0 million / 90% |
| Operating income / margin | $80.7 million / 24% | $63.7 million / 19% |
| Income from continuing operations | $49.5 million | $39.8 million |
| Net income | $49.5 million | $74.9 million |
| Diluted EPS from continuing operations | $0.96 | $0.72 |
| Operating cash flow | $107.7 million | $4.6 million |
| Cash, cash equivalents and short-term investments | $283.3 million | $231.4 million |
FY2014 revenue was essentially flat year over year. License revenue fell 4%, while maintenance and services rose 1%, including professional services growth of 39% to $12.2 million, primarily reflecting the BravePoint acquisition. Operating income increased 27%, mainly as operating expenses declined 8%; research and development expense rose 3% to $59.0 million. The 90% gross margin was unchanged.
Net income fell 34% because FY2013 included $35.1 million of income from discontinued operations, including gains on divested product lines. FY2014 income from continuing operations increased 24%. Operating cash flow rebounded from $4.6 million to $107.7 million, chiefly because FY2013 included $56.3 million of tax payments related to divestitures and higher restructuring payments. FY2014 investing cash flow was $5.1 million and financing cash flow was negative $42.2 million, including $52.6 million of share repurchases.
At November 30, 2014, the company had no funded debt outstanding. On December 2, 2014, it entered a new facility with a $150 million term loan and a $150 million revolving credit line, and used the term loan to help fund the Telerik acquisition. The facility is secured, matures in 2019, and contains financial and operating covenants. FY2014 deferred revenue and disclosed multi-year licensing arrangements totaled $116.5 million.
Material changes and unusual items
- OpenEdge revenue rose 1% to $296.7 million; DCI revenue fell 13% to $34.8 million, partly reflecting large multi-year OEM renewals recognized in FY2013. AppDev revenue was $1.0 million and its segment contribution margin was negative $8.3 million.
- FY2014 quarterly revenue was $74.5 million, $80.8 million, $79.3 million, and $97.9 million, respectively. Fourth-quarter revenue increased from $91.0 million in FY2013; fourth-quarter operating income was $27.0 million versus $23.9 million.
- Acquisitions during FY2014 included Modulus and BravePoint. Telerik was acquired after year-end for $262.5 million; approximately $11 million of consideration was payable in restricted stock units subject to vesting and continued employment. The initial purchase accounting was incomplete when the financial statements were issued.
- The company repurchased 2.3 million shares for $52.6 million under a new $100 million authorization. It also sold its remaining auction rate securities, receiving $26.2 million and recognizing a $2.6 million realized loss.
- The effective tax rate was 36% in FY2014 versus 37% in FY2013. The company recorded $2.3 million of restructuring expense and $5.9 million of acquisition-related expense.
Outlook, commentary and risks
Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It said existing cash, operating cash generation, and availability under the new credit facility should be sufficient for foreseeable requirements through at least the next 12 months. Management’s strategy emphasizes cloud/PaaS application development and investment in product development; it cautioned that Telerik integration could disrupt FY2015 operations.
Principal risks include dependence on OpenEdge, intense competition, execution and adoption risks in cloud subscriptions, reliance on channel partners and OEMs, foreign-exchange exposure, acquisition integration and contingent consideration, and compliance with secured-credit covenants. Management estimated that a hypothetical 10% adverse foreign-currency movement could reduce reported revenue by about 5% and net income by about 13%, before hedging effects. Ordinary-course legal matters were not expected by management to materially affect financial position, results, or cash flows. The auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether OpenEdge can sustain growth and whether DCI’s decline reflects timing effects or ongoing demand weakness.
- The post-year-end Telerik purchase price allocation, integration costs, contribution to results, and expected synergies.
- Actual borrowing, repayment, interest expense, covenant headroom, and liquidity after the acquisition and under the new secured facility.
- Subscription/PaaS customer adoption, renewal rates, revenue-recognition timing, and cash-flow effects as the business mix evolves.
- Foreign-currency sensitivity and the effectiveness of hedges, alongside future share repurchases and capital allocation.